Black swan

Black Swan is a term used in probability theory and philosophy to describe an event that is extremely rare, unpredictable, and has a significant impact. The term was popularized by Nassim Nicholas Taleb, a finance professor, writer, and former Wall Street trader in his 2007 book, The Black Swan: The Impact of the Highly Improbable.

Origin of the Term

The term 'black swan' originates from the 17th-century European assumption that 'all swans are white'. In that context, a black swan was a metaphor for something that could not exist. The 1697 discovery of black swans in Australia transformed the term to imply that a perceived impossibility might later be disproven.

Black Swan Theory

The Black Swan Theory was developed by Nassim Nicholas Taleb to explain:

1. The disproportionate role of high-profile, hard-to-predict, and rare events that are beyond the realm of normal expectations in history, science, finance, and technology.
2. The non-computability of the probability of the consequential rare events using scientific methods (owing to the very nature of small probabilities).
3. The psychological biases that make people individually and collectively blind to uncertainty and unaware of the massive role of the rare event in historical affairs.

Black Swans and Finance

In finance, the term is often used to describe catastrophic events such as the 2008 financial crisis. According to the black swan theory, these events are impossible to predict, but they have severe consequences and are the subject of much scrutiny after they have occurred.

See Also

• Taleb distribution
• Uncertainty
• Predictability
• Financial crisis
• Probability theory